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BLOG: Political unrest and that Thai economy

May 14th, 2010 · No Comments

Much is made of Thailand’s economic fundamentals but the fact remains that the current political turmoil will only dampen economic activity, chase away tourists and investors and weaken the country’s overall performance.

Here are a few comments on the likely impact on the economy, these have all been made very recently, but not in response to last night’s clashes and the shooting of Seh Daeng.

Scott Campbell, an MBMG Group-affiliated portfolio manager and managing director of award-winning MitonOptimal Guernsey, recently told me during his Bangkok visit that the currency markets show country risk has already affected Thailand’s performance and recovery over the past year or so.

Despite popular claims from local business chiefs and exporters to the contrary, Thailand’s “strong” baht has actually underperformed the region’s other currencies by about 10%. “That is almost entirely down to the local political situation,” he said.

Country risk has also weighed significantly on Thailand’s gross dometic product when compared with competing Southeast Asian economies. ”If you take the superior GDP growth rate of a jurisdiction like the Philippines and apply this higher rate to Thailand’s growth from 2005, it can be seen that by the end of 2008 Thailand’s GDP would be somewhere between US$30 billion and $40 billion higher than now,” he said.

Prolonged protests have dented consumer confidence, turning consumers away from retail outlets as the slowdown in tourism harms employment and incomes. Exports and industrial production, as well as the more obvious private consumption and tourism, have been affected by the red-shirt rally at Ratchaprasong intersection, said Matthew Circosta, an economist at Sydney-based Moody’s Analytics.

“Indeed, absent political troubles, the economy’s growth fundamentals are still strong,” he said. “The accelerating Chinese economy is boosting demand for Thailand’s suite of manufactured goods, while robust regional demand and higher commodity prices are driving a surge in agricultural exports. The troubled domestic environment has yet to harm industrial production, which continues to accelerate as manufacturers ramp up production to cash in on rising business orders amid strong external demand.”

“Nevertheless, if the political turmoil continues, it will take a toll on production, while consumer spending could decelerate sharply. As a result, accommodative monetary policy settings will remain in place as the deteriorating political environment clouds the economic outlook and suggests the Thai expansion is not firmly entrenched.”

“If, and, when the protests end, the Thai economy should resume expanding, underpinned by recovering global demand, which should propel overseas shipments and production. A strong labour market, higher farm incomes, and rising business sentiment and capacity utilization should boost consumption and investment. Stronger domestic demand is needed to put the Thai recovery on a more sustainable path, and resolving the political uncertainty will help in that regard.”

Steve Vickers, president and CEO of Hong Kong-based FTI-International Risk, said more violence is likely and offered a pessimistic view of how the political impasse will drag on the economy. “Foreign investors will need a very long term investment horizon if they are to become involved in the  Thai market at this time,” he said. “Others, who are already committed, should consider inventory levels and contingency planning in the event of  disturbance to their supply chain in the medium term.”

Last week, Phatra Securities said in a research note that Prime Minister Abhisit Vejjajiva’s road map for national reconcilliation has a 50/50 chance of success.

After last night’s clashes the chances of its offering a resolution have been weakended further unless the red-shirts decide to pack up and go home.

If the road map gets a second chance, it will still face three challenges as Phatra pointed out.

“First, offering to dissolve parliament in September may not be giving away much given that the Constitution Court could rule to dissolve the Democrat party (forcing Abhisit out of office) before then as recommended by the Election Commission. Second, the government has accused the red shirts and their supporters of harboring terrorists and, more seriously, have fast-tracked an investigation on whether they have attempted to undermine the monarchy. Both are serious criminal offences that cannot be pardoned. Third, the promise of constitution reform is vague given the fact that the same promise was made in April 2009.”

However, some analysts are fairly positive that toe country with muddle through the current mess, Thai-style.

“Political turbulence is status quo for Thailand — it does not have a major impact on neighbours, several of which — Myanmar, Laos and Cambodia — are more dysfunctional than Thailand anyway,” said MAtthew Gertken, East Asia analyst at STRATFOR Intelligence. “Thailand’s tumultuous politics is therefore self-contained. It arises mainly from the cyclical clashes between the traditional pillars of power — the military, monarchy, Bangkok bureaucracy — and major forces of change, such as the business class emerging from globalization and the tide of political populism supported by the North and Northeastern provinces.

“Thailand has gone through periods of social and political unrest numerous times in modern history, including the early 1970s and early 1990s, and has seen 18 military coups since 1932, but nevertheless has proved remarkably resilient over the long run, due to its well established civil institutions and economic advantages rooted in geographic location.

“However, instability looks likely to continue and even intensify in the short to medium term because of the … [poor health] … of the widely admired Thai King Bhumibol Adulyadej … [whose passing] threatens to weaken the monarchy as an institution that promotes social stability and national unity. Add to this the fact that a generation of army chiefs is retiring, leading to divisions within the army, the one institution that has repeatedly seized power when the country appeared to be spinning out of control. In the last half century Thailand has managed to find some accommodation to contain political instability within relatively brief periods of time and limit it to the surface, without letting foundations be overturned.”

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